The pitfalls of incorporating with Model Articles
Iwan Thomas | 10.01.2020
11.11.2019 Manmohan Singh
When the decision is finally made to sell a business, the prospect of receiving the full consideration often outweighs anything else meaning that sellers tend to look for a quick sale. However, a corporate transaction can be an intricate process with complex issues at stake and parties on both sides looking to achieve the best possible result. If you are planning to sell your business, it is advisable to be proactive in the stages leading up to the sale and consider the following:
1. Confidentiality – it is important to protect the confidentiality of your business from the outset. Should the buyer be performing a thorough due diligence process they will inevitably come across potential trade secrets, material contracts and various other important pieces of information. A carefully drafted non-disclosure agreement will prevent a buyer in using any confidential information which they acquire from due diligence to approach your client base or use in their own business, should the deal fall through.
2. Type of Sale – consideration should be given to whether your business should be sold by way of asset sale or share sale. In an asset sale, the buyer will choose certain assets to form part of the purchase. This way the buyer can cherry pick which assets they wish to obtain, and effectively leave the company that owns the business as a “shell” with its remaining liabilities. Alternatively, a buyer can purchase all or some of the share capital of the company itself. When purchasing the entire issued share capital they are acquiring “all” of the business and therefore will carry out due diligence on the target company given they will assume liabilities. For the seller, a share shale gives the shareholder a “clean break” as they are not left with any liabilities, however they may need to give more warranties and indemnities as to the target company’s position to give comfort to the buyer.
3. Due Diligence – due diligence is the process which the buyer undertakes to discover more about the business they are purchasing and to flush out any potential issues. It is worth remembering that a buyer is trying to find out in a few weeks what you have built up over many years. With this in mind, if there are any known issues, you should to address these prior to due diligence commencing, rather than wait until being prompted by a buyer. The buyer’s legal counsel will often send a due diligence questionnaire with various questions to be answered and a well prepared seller will have the supporting documentation prepared in advance. To prepare for the due diligence process you should, amongst other things, ensure all executed material and employment contracts are in the possession of the company, the correct policies are in place and all records are up to date. A template due diligence questionnaire can be obtained from your legal counsel to assist preparation.
4. Statutory Books – often not touched since incorporation, the statutory books and registers are a very important part of a company’s existence. The statutory books contain various registers which are required to be kept by law. These registers show the current members and directors of a company as well as any applications and allotments for shares. Often the statutory books of a company have been lost, never updated or simply never even written up. This can cause issues when coming to sell a company as the buyer will expect to see registers which show the current position of the members and any historical transfers. Should they fail to be produced, a company will have to reconstitute them and likely provide various indemnities to the buyer. Alternatively, a court order can be obtained to rectify the books which can be a time consuming and expensive process. It is very important therefore that if you are planning to sell your company in the near future to make sure your statutory books are up to date.
If you are thinking of selling your business, we would be happy to guide you through the process, please contact our corporate London office team Iwan Thomas, Solicitor (Tel: 020 3962 5846 or email: firstname.lastname@example.org) or Manmohan Singh, Partner (Tel: 020 3962 5850 or email: email@example.com).